Under the Fair Labor Standards Act (FLSA), retail and service employees paid primarily on a commission basis can be classified as exempt from overtime pay. One of the eligibility criteria is that the employer must be a "retail or service establishment," as defined by the FLSA. Section 7(i) of the FLSA defines retail and service establishments as those in which 75% of the annual dollar volume of sales of goods and services is not for resale and is regarded "as retail sales or services in the particular industry."
The DOL relied on two non-exhaustive lists issued in the 1960s when determining whether an establishment did or did not meet the FLSA's definition. One of the lists identified eligible establishments as ones that had "no retail concept," such as real estate companies, accounting firms and construction contractors. On the other list, eligible establishments are those "that may be recognized as retail," such as department stores, restaurants and auto repair shops.
Employers, legal counsels and courts have criticized the lists as being too confusing — they caused some employers to be unsure of whether they are a retail or service establishment for FLSA overtime exemption purposes.
On May 19, 2020, the DOL published a final rule clarifying FLSA overtime exemptions for commissioned retail and service workers. The final rule withdraws the two aforementioned non-exhaustive lists, thereby reducing confusion regarding what constitutes a "retail or service establishment" and allowing for more consistent treatment across these industries.
The rule, which took effect immediately, does not impose any new overtime exemption requirements for retail and service establishments. However, retail and service employers that want to use the FLSA overtime exemption for commissioned employees must still ensure these three long-standing requirements are met:
The commissioned individual must be an employee of the retail or service establishment.
The employee's regular rate of pay must be greater than 1.5 times the applicable FLSA minimum wage.
Over half of the employee's total compensation "in a representative period" must comprise commissions. This representative period can be as short as one month but not longer than one year.
The employer must also still satisfy the FLSA's "75% of the annual dollar volume of sales" rule mentioned earlier.
If the retail or service employer and employee both fulfill their respective FLSA conditions, then the employee can be classified as exempt. This means that, under federal law, the employee does not have to be paid overtime for hours worked over 40 in a workweek.
Next steps for retail and service employers
Retail and service establishments that did not previously claim the overtime exemption because of the now-withdrawn DOL lists may want to revisit that determination. Even if you were eligible and have been claiming the exemption, it's still a good idea to review your current overtime pay policies to ensure they're in line with the FLSA and the DOL's interpretations.